WAE 6 - Tax planning Flashcards
When are loans not deductible for IHT purposes?
- Loans for BPR/APR/Woodlands Relief assets – Deduction is applied to the relievable asset rather than the chargeable estate.
- Loans not repaid from the estate – Only deductible if actually repaid.
- Loans used to acquire excluded property.
- Loans funding foreign currency accounts.
When does GROB apply to a gift?
- The donor still benefits from the asset.
- The donee does not take full possession before the 7-year period.
- The donor continues to use the asset (e.g., living in a gifted house rent-free).
What happens if a GROB still exists at death?
The asset remains part of the donor’s estate for IHT.
What does General Anti-Abuse Rule (GAAR) target?
Tax arrangements that are:
* Designed to create a tax advantage.
* Abusive under the double reasonableness test.
* Contrary to the purpose of tax law.
What are the consequences of GAAR?
- HMRC can counteract the tax advantage.
- 60% penalty on the counteracted amount.
- GAAR Advisory Panel reviews HMRC’s application.
How should BPR/APR assets be gifted for tax efficiency?
- Do not gift to an exempt beneficiary (e.g., spouse/charity), as this wastes relief.
- Consider gifting to a discretionary trust, where relief applies, but the assets remain outside the spouse’s taxable estate.
Who are exempt beneficiaries for IHT?
- Spouse/Civil Partner – 100% exemption.
- Charities – Fully exempt.
What is the impact of specific gifts vs. residuary gifts to exempt and chargeable beneficiaries?
- Specific gift to an exempt beneficiary – No IHT applies; only the residue is taxable.
- Specific gift to a chargeable beneficiary “subject to tax” – IHT is deducted from the gift.
- Specific gift “free of tax” – Grossing-up applies (tax is paid from other funds), increasing IHT liability.
When does double grossing-up occur?
- When some but not all chargeable gifts are given “free of tax”.
- When the residue is left to an exempt beneficiary.
How can double grossing-up be avoided?
- Avoid gifting chargeable amounts “free of tax”.
- Clearly structure will provisions to prevent unnecessary IHT increases.
How can NRB planning benefit married couples?
- Leaving everything to the spouse ensures spouse exemption but does not use the NRB.
- Using the NRB at first death (e.g., discretionary trust) ensures both NRBs are fully used.
Why is NRB planning crucial for unmarried couples?
- No spouse exemption, so IHT applies on both deaths.
- Risk of “bunching” IHT (assets taxed twice if left entirely to surviving partner).
What is the solution for NRB planning in unmarried couples?
Use a discretionary trust at first death to reduce the survivor’s estate.
What conditions must be met to claim RNRB?
- A “qualifying residential interest” (QRI) must be inherited by direct descendants.
How can RNRB be lost?
- If residue is split between chargeable and non-chargeable beneficiaries.
- If the property is left in a discretionary trust.
What are the key advantages of a discretionary trust in a will?
- Keeps assets out of a beneficiary’s taxable estate.
- Protects assets from creditors/divorce claims.
- Can manage IHT liability over multiple generations.
Why does a discretionary trust not qualify for RNRB?
RNRB only applies if descendants inherit outright.
What is a 2-Year Discretionary Trust in a will?
A temporary trust that allows flexibility in asset distribution.
How does a 2-Year Discretionary Trust benefit IHT planning?
- If assets are distributed within 2 years, the trust is treated as if it never existed for IHT.
- If assets pass to exempt beneficiaries, a refund of IHT can be claimed.
What is a Life Interest Trust?
A life tenant receives income, while capital is preserved for remaindermen.
How does a Life Interest Trust impact IHT?
- If the spouse is the life tenant, spouse exemption applies.
- If a non-spouse is the life tenant, IHT applies at death.
- If life tenant is not a spouse and remainderman is spouse, spouse exemption does not apply.
